How the Petronas-Progress deal all came falling down

On Sunday Nov. 14, 2010, BHP Biliton Inc. dropped its nearly $40-billion bid for Potash Corp. of Saskatchewan because the global mining giant could not alter the terms of its deal enough to meet Ottawa’s demands

CALGARY • Michael Culbert, president and CEO of Progress Energy Resources Corp., was anxiously pacing in his Calgary office Friday evening, staying in touch with his counterparts half a world away in Kuala Lumpur, when he went wide-eyed reading the news he was expecting.

It was 11:57 p.m. Ottawa time, 9:57 p.m. in Calgary, or three minutes before the expiry of the federal government’s own deadline to hand down a ruling on whether Progress’s takeover by Malaysia’s Petronas met the confusing “net benefit” test and could be finalized.

The brief news release said Industry Minister Christian Paradis had just blocked the deal.

Mr. Culbert and his Malaysian buyers were in shock.

Talks between Petronas and the Canadian ministry had gone well, the deal had received little public attention, and the two companies were confident that the merger would prove to be of huge benefit to the country. It fit well into Canada’s strategy of launching exports of liquefied natural gas (LNG) to Asia from the British Columbia coast.

“We [were] moving forward on a very positive step as far as all the activities go, and there really [weren’t] signals until the last hours that this wasn’t going to be approved,” Mr. Culbert said in an interview.

There had been no indications the deal would be impacted by new guidelines promised by the Prime Minister, Stephen Harper, on foreign investment, particularly state-owned enterprises.

Progress and Petronas had been working together for a couple of years and locked up a joint venture last year. The acquisition was widely seen as the logical next step as the two companies moved forward with plans to build a multibillion-dollar plant in Prince Rupert.

“I think that it’s very easy to see that by developing our shale gas opportunities in Western Canada, by developing a new export business industry for Canada, that ultimately this is very positive for Canadians,” Mr. Culbert said.

Details get thin at this point, but it’s believed that the deal was scuttled by the Prime Minister himself, even though Industry Canada was set to approve it.

Industry Canada asked Petronas for a delay until Dec. 7 to decide on its bid, but the Malaysian company couldn’t agree because its arrangement with Progress expires on Oct. 31 and an extension required approval from the boards of both companies — something that could not be arranged late on a Friday evening in Calgary, and mid-day on Saturday in Kuala Lumpur.

By developing a new export business industry for Canada, that ultimately this is very positive for Canadians

It was a stumbling block, but not yet a deal breaker.

However, with markets on edge about the foreign investment review process already, Progress and other companies considered to be takeover candidates started worrying about a costly backlash.

Analysts were predicting the worst — that Canada was closing the door on foreign investment and that billions would be lost within the first moments of Monday trading.

In the early hours of Saturday, as a cold blast of winter swept through Calgary, executives with Progress and Petronas spoke by phone about damage control.

Worried the rejection was due to a “communications breakdown” rather that a failure to meet Canada’s rules, Petronas and Progress doubled-down to see what could be done to salvage the deal, including taking steps to extend the bid’s Oct. 31 deadline.

Mr. Culbert said Petronas is so motivated to conclude the purchase it has offered all of his employees jobs, including laying out vacations, benefits, improvements to various aspects of their compensation. Drilling and plans for the LNG project are moving forward aggressively.

Executives from both companies mobilized as quickly as possible and were on flights to Ottawa Monday for meetings with Mr. Paradis. A news release announcing the pending visit was issued to manage concern that the deal was dead.

“We are hopeful to get meetings with the Minister of Industry to start that dialogue in this 30-day period, to understand what those issues are and see how we can remedy them,” Mr. Culbert said. “It doesn’t seem that we are far apart here. If time is the issue, let’s understand what is required and be able to move forward on that front.”

No one, including Mr. Culbert, seems to know where the government is headed with its new guidelines.

But everyone agrees the government itself is struggling to achieve a balance between investors who want Canada to keep its doors open to foreign capital and Canadians who are worried about too much foreign control of natural resources.

“The minister did indicate, as you know, on Friday that the government is not at the current time in a position to say that the particular transaction is a net benefit to Canada,” Prime Minister Stephen Harper said Monday.

“There is a comment period, a response period of 30 days … and so we’re not going to say anything that would prejudice that particular discussion during this time. But as I’ve said before in the context of another transaction, the government has in the not-too-distant future the intention to put out a clear, new policy framework regarding these sorts of transactions.”

But a lot of damage was done. Investors across North America were frantically trying to understand Monday how to read Ottawa’s strange signals. Progress energy shares lost 9%; Nexen was down 4.4%.

Canada’s foreign investment guidelines have been widely criticized for their ambiguous language, for being open to political manipulation and for being inadequate to deal with the rush of investment into the oilpatch.

Regardless of what the final decision on Progress turns out to be, Ottawa proved critics right with its handling of the purchase. That, too, is not in Canada’s net benefit.

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